Too big to fail or to bail out?
By William Safire
http://www.iht.com/articles/20...opinion/edsafire.phpThere are times when helping people in the short run may hurt them in the long run. Contrariwise, there are times when refusing to help people in the short run means they won't have a long run at all.
That's the dilemma inherent in the phrase
moral hazard. Does protection against risk tempt a person to do ever-riskier things? Does it endanger your moral sense - undermine a person's character or weaken an institution's self-discipline - to reduce the severe consequences of foolish action?
The phrase was born in the controversy in the mid-19th century about the wisdom of the ascending scale of life-insurance premiums, encouraging the healthy to drop out and the sickly to stay in. The American Cyclopedia in 1875 called that "a moral hazard too great to be incurred in the present state of society."
There are still those who mutter that burglary insurance discourages people from locking their doors, but the idea of all kinds of insurance - purchased by individuals or given by government - seems to have caught on.
The concern of conservatives that government "relief" undermined the work ethic led to bipartisan reforms that encouraged "workfare"; the worry of liberals was that large companies or leading banks would undergo moral hazard if they were protected by government as
too big to fail.
That phrase, used in a 1936 New York Times subheadline about a call by the former governor Al Smith ("He Says New York Is Too Big to Fail in Duty of Giving to Private Welfare Agencies"), surfaced again in a 1975 Business Week headline about a government loan guarantee to protect Lockheed Aircraft: "When Companies Get Too Big to Fail." Later that year, The Economist noted "all the scary stuff about what the collapse of New York would do to the domestic and world financial system" and predicted the city's rescue because "it is too big to fail."
Before too big to fail became a nervously practical answer to the worry about moral hazard, the word coined to describe the method used to rescue a financial entity from the consequences of risky or irresponsible behavior was bailout.
The verb to bail, "to throw water out of a boat in buckets or bails," has been with us since 1613. In 1930, that term for the rescue of fishermen lightening the load of a leaky boat was applied to pilots who saved their lives by throwing themselves out of aircraft in parachutes. But as Business Week noted in its 1975 article about the Lockheed case, "The mounting number of bailouts . . . blurs the distinction between the capitalist revolution and the Marxist version."
When did the noun bailout gain its pejorative connotation? As far as I can tell, it started out as a word with built-in disapproval. Deep in the vast file of citations at Merriam-Webster is a 1951 report by Time magazine in which Senator Stuart Symington accused a former federal bureaucrat, then with an oil company, of directing a loan "damned by the Senate Banking Subcommittee as a 'bail-out' for big banks and Massachusetts insurance companies." The definition is now in the Merriam-Webster Online Dictionary as "a rescue from financial distress."
When challenged to antedate that, Jesse Sheidlower of the Oxford English Dictionary ran the traps of search engines to come up with a 1940 Wall Street Journal usage quoting a Securities and Exchange Commission official saying he would "prohibit loans to officers and other methods of effecting a 'bail-out.' "
So, if you're not worried about the moral hazard of removing the penalties that inhibit too much risk-taking, and you can justify government intercession because the demise of an erring institution would spread and is thus too big to fail, then proceed with the bailout. You're damned if you do and damned if you don't. (Where's that from?)
